Following a blockbuster year for the stock market in 2020, investors are looking for the best bets for the year ahead.
With some major IPOs on the horizon, and the largest companies on stock exchanges across the world seeing incredible growth – there is a new trend that all investors should be aware of: Special Purpose Acquisition Company or SPACs.
What is a SPAC?
A Special Purpose Acquisition Company is created to pool funds in order to finance a major merger or acquisition opportunity, where that opportunity has not yet been identified.
In layman’s terms; a SPAC is a large amount of funding looking for a company to launch on a stock exchange, whereas a traditional initial public offering (IPO) is a company looking to raise funding.
SPACs allow investors to partake in private equity type transactions in stocks and shares, through a version of a leveraged buyout – where one company’s acquisition of another uses a significant amount of borrowed money to meet the cost of acquisition.
They have been increasingly popular in the US over the last five years – with more than 200 in 2020 (compared to 12 in 2014). But, are they set for a similar surge in popularity the UK?
What do investors need to know?
In the US, 2020 was a record year for SPACs as $83bn was raised across 242 IPOs, and already in January 2021, $16bn has been raised in similar offerings.
Perhaps surprisingly, this trend has been slow to translate to Europe, but an excess of demand in the US is likely to see a significant increase of SPAC IPOs in 2021.
To gain a greater understanding of the future for SPACs in the UK and wider investment industry across the world, Business Leader spoke to Paul Amiss, London Partner at international law firm Winston & Strawn, who is a leading expert on SPACs.
UK and European SPACs: What do you need to know?
In the United States, 2020 was obviously a record year in the history of special purpose acquisition companies (SPACs), with 242 initial public offerings (IPO) raising in excess of $83bn in aggregate.
This trend has continued and at the time of writing, in January 2021 there were 59 reported IPOs raising in excess of $16bn. These numbers are quite remarkable when it is considered that SPAC IPO activity in 2019 featured 59 IPOs in 2019 raising $13.6bn in total. The month of January 2021 alone has accounted for all SPAC IPO activity in 2019.
European SPAC market
In Europe however, the numbers paint a very different story with only a handful of SPAC IPOs taking place over this period. Whilst there have been smaller cash shells going through an IPO, larger deals have been pulled due to lack of investor demand.
Euronext in Amsterdam and Paris have shown signs of life with one vehicle raising €110m on Euronext Amsterdam and another vehicle raising €250m on Euronext Paris.
An increasing number of market participants think there is an opportunity for the European SPAC market to grab some of the US market share, as a result of the excess in demand in the US outstripping supply of suitable US-based targets. Despite the Amsterdam and Paris IPOs referred to above, we believe that this opportunity could be taken by London.
It has also been reported that certain European exchanges are considering changing rules around SPACs to allow vehicles to look and feel more like a US structure in order to entice a robust investor base.
In the UK, as the UK looks to refine itself post-Brexit, there is increasing market sentiment for the UKLA to adjust its rules around reverse takeovers which govern a SPAC’s process for acquisition.
It remains to be seen whether the UK Listings Review, chaired by Lord Hill, (which was launched by the Chancellor in November 2020 as part of a plan to strengthen the UK’s position as a leading global financial centre) will result in a refinement to these rules.
The reason for the lack of a SPAC market in London (and across Europe) is primarily due to a lack of investor confidence in the model, partly driven by some high-profile failures in previous years.
The traditional model in the UK is often seen as a sponsor friendly model and notably lacks some key investor protections which are now part of the fabric of the US model (for example, any acquisition being subject to shareholder approval and the ability of shareholders to redeem their shares – see below).
If such a US type SPAC structure can be created in the UK through to a successful transaction for investors and sponsors alike, this should lead to a sustainable SPAC market in the UK.
This market would be underpinned by subscriptions from traditional SPAC investors who are familiar with and have confidence in the US model. We believe that even without any rule change in London, it is possible to create a US type SPAC structure in the UK.
US SPAC structures
By way of a reminder, SPACs are shell companies that use the proceeds from going public to buy another company, not yet identified at the time of listing. The resulting merger with a target company, often a start-up in a high-growth sector, offers it a faster and lower cost way to market than a traditional IPO.
In the US, on the SPAC IPO, monies raised from the offering from public investors are put into a ring-fenced trust account and invested by a custodian in treasuries. These monies can only be released on completion of an acquisition and are applied towards paying the consideration for the acquisition and to repay shareholders who have opted to redeem their shares (see below).
The sponsor team pay the expenses of the IPO, the up-front underwriter fee (usually 2%) plus around $1-2m in working capital out of their own pocket. This is the risk capital investment of the sponsor and in return the sponsor is allocated founder shares, which convert into 20% of the common stock of the company upon completion of an acquisition, and warrants, which provide the sponsors additional upside on a successful transaction.
Public investors are issued with a unit comprising common stock and warrants which are issued on broadly similar terms as the warrants issued to the sponsor, subject to certain exceptions. Crucially, they get a vote to approve the acquisition and they also get the opportunity to redeem their shares and get their money back if they do not like the proposed acquisition.
Following IPO, the sponsor team search for potential targets for a business combination and once they have agreed terms an announcement is a made to the market. Typically, the shares continue to trade following the announcement and a proxy statement is then prepared and sent to shareholders for them to vote to approve the acquisition and to exercise their rights of redemption. Once the shareholders approve the transaction and the redemption process completes, the transaction can complete with the proxy statement also comprising a prospectus for the issue of any consideration shares and the issue of shares as a result of the conversion of the founder shares.
Key differences between US and UK SPACs
In very high-level terms, we see the main differences between the US and UK models as being:
- the up-front sponsor risk capital – in the UK, IPO expenses are paid out of the IPO proceeds and the sponsors only pay for such expenses in the event of a winding up of the vehicle;
- IPO proceeds being placed into a ring fenced trust account – there is no such requirement in the UK;
- the acquisition being subject to a shareholder vote – there is no such requirement in the UK;
- the redemption mechanic – there is no such requirement in the UK and for a UK company this could amount to an unlawful reduction of capital;
- shares continuing to trade post announcement of an acquisition – in the UK there is a rebuttable presumption of suspension upon announcement of the transaction;
- the listing being not being cancelled on completion of the acquisition – in the UK the reverse takeover rules provide that the listing is cancelled pending production of a prospectus for the enlarged group.
Possible Future for the UK
The above differences in our view help to undermine investor confidence in the UK SPAC model. We believe that with appropriate structuring, it is possible to substantially replicate each of these US features and that, although it would be helpful for the UKLA to adjust its rules around reverse takeovers, we do not need to wait for a regulatory rule change to do this. In particular we would note that as a SPACs tend to list on the Standard Segment of the London Stock Exchange, there is a high degree of flexibility as to structuring.
A recent example?
Business Leader delved into a company that recently used this vehicle to become a listed entity – ChargePoint, Inc. a US-based electric vehicle charging network – who are now trading on Wall Street following a SPAC with Switchback.
ChargePoint and Switchback Energy Acquisition Corporation, a publicly-traded special purpose acquisition company with a strategic focus on the energy sector, announced the signing of a definitive business combination agreement in September 2020.
ChargePoint expects to use transaction proceeds to expand its reach in North America and Europe, further enhance its technology portfolio and significantly scale its commercial, fleet and residential businesses ahead of the anticipated introduction of an increasing number of new EV models and rising EV penetration.
Pasquale Romano, President and CEO, ChargePoint said: “For thirteen years we have been singularly focused on our vision to move all people and goods on electricity, and that has never been more relevant than it is today.
“We’ve pioneered networked charging and are resolute in our aim to usher in the transition to mass EV adoption by electrifying one parking spot at a time. Today, we are a charging market leader thanks to a winning business model, a complete portfolio and thousands of brands that have realized that EV charging is essential, good for business and aligned with their corporate and sustainability goals.
“Our technology charges all EVs – from passenger vehicles to delivery fleets – so there is no need to choose winners in electric mobility. We see ourselves as an index for the entire category.”
Scott McNeill, CEO, CFO and Director of Switchback commented: “The EV charging industry is accelerating and it is expected that charging infrastructure investment will be $190bn by 2030. As a first mover in the space, ChargePoint has distinguished itself as the number one EV charging network and is well positioned to deliver mission-critical charging infrastructure as the expected transition to electric mobility accelerates.
“ChargePoint has a proven and capital-light business model that combines hardware and high-margin, recurring software subscriptions and services with extensive and strong customer relationships. As a result, we believe ChargePoint will continue to grow its strong market position as the EV industry evolves. Switchback and our investors are excited to partner with the talented ChargePoint team to advance their vision.”
Founded in 2007, ChargePoint is a category creator in EV charging, helping to make the mass adoption of electric mobility a reality. The firm has created one of the world’s largest charging networks with a capital-light model by selling individual organisations and businesses, known as site hosts, everything they need to electrify their parking spaces – networked charging hardware, software subscriptions and associated support services.
Charging is matched to parking duration, from energy-managed AC level 2 to DC fast charging. The parking spaces owned by ChargePoint’s site hosts are seamlessly integrated into one network available to the driver in a top-rated mobile app. ChargePoint’s winning operating model and high-quality solutions foster loyal site hosts who expand their charging footprint as EV penetration rises, creating a virtuous loop of brand awareness, satisfied drivers, organic networked charging hardware and recurring SaaS revenue.
Upon the transaction closing, ChargePoint will continue to be led by President and CEO, Pasquale Romano and the existing management team. Romano brings more than 30 years of executive leadership experience with technology companies including 2Wire, Inc. and Polycom, Inc. During Romano’s nearly ten-year tenure at ChargePoint, it has emerged as a leading EV charging network.
The business combination values ChargePoint at an implied $2.4bn enterprise value. Upon transaction closing, and assuming no redemptions by Switchback stockholders, ChargePoint will have approximately $683m in cash, resulting in a total pro forma equity value of approximately $3bn. Cash proceeds raised in the transaction will be used to repay debt, fund operations, support growth and for general corporate purposes.
The proceeds will be funded through a combination of Switchback’s approximately $317m cash in trust, assuming no redemptions by Switchback stockholders, and a $225m PIPE of common stock valued at $10.00 per share led by institutional investors including Baillie Gifford and funds managed by Neuberger Berman Alternatives Advisors.
In addition, Switchback’s sponsor and certain other of its founder stockholders have agreed that a portion of their equity will vest only if following the closing the share price of ChargePoint exceeds $12.00 per share for any ten trading days within any twenty consecutive trading day period prior to the fifth anniversary of the closing of the transaction.
Upon the transaction closing, the combined company was renamed ChargePoint Holdings, Inc. and was listed on the New York Stock Exchange.